Pa Advisors Llc V. Google Inc by fom79730

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									                                       No. 10-6
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                                         In The
 Supreme Court of the United States
                   ---------------------------------♦---------------------------------

        GLOBAL-TECH APPLIANCES INC., et al.,

                                                                                         Petitioners,
                                                 v.

                                      SEB S.A.,

                                                                                         Respondent.

                   ---------------------------------♦---------------------------------

             On Writ Of Certiorari To The
            United States Court Of Appeals
               For The Federal Circuit

                   ---------------------------------♦---------------------------------

     AMICUS CURIAE BRIEF OF NEWEGG, INC.
         IN SUPPORT OF PETITIONERS

                   ---------------------------------♦---------------------------------

                                                PETER J. BRANN
                                                (Counsel of Record)
                                                DAVID SWETNAM-BURLAND
                                                STACY O. STITHAM
                                                BRANN & ISAACSON
                                                184 Main St., P.O. Box 3070
                                                Lewiston, Maine 04243-3070
                                                (207) 786-3566
                                                pbrann@brannlaw.com

                                                Attorneys for Amicus Curiae

================================================================
               COCKLE LAW BRIEF PRINTING CO. (800) 225-6964
                     OR CALL COLLECT (402) 342-2831
                                  i

                   TABLE OF CONTENTS
                                                                Page
TABLE OF AUTHORITIES .................................              ii
INTEREST OF AMICUS CURIAE ......................                    1
SUMMARY OF ARGUMENT ..............................                  3
ARGUMENT ........................................................   6
  THE COURT SHOULD RESTORE THE
  BRIGHT-LINE STANDARD OF “ACTUAL
  KNOWLEDGE” FOR INDUCED PATENT IN-
  FRINGEMENT TO PROVIDE NEEDED CER-
  TAINTY TO INTERNET RETAILERS AND
  OTHER BUSINESSES ......................................           6
CONCLUSION..................................................... 14
                                        ii

                    TABLE OF AUTHORITIES
                                                                           Page
CASES
Am. Med. Sys., Inc. v. Med. Eng’g Corp., 6 F.3d
 1523 (Fed. Cir. 1993) .................................................8
Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) .....................7
Atlantic Works v. Brady, 107 U.S. 192 (1883) ...........12
Bell Atlantic Corp. v. Twombly, 550 U.S. 544
  (2007) .........................................................................7
Bender v. Nat’l Semiconductor Corp., 2009 WL
  4730896 (N.D. Cal. Dec. 7, 2009)..............................7
Bilski v. Kappos, 130 S. Ct. 3218 (2010) ....................12
DSU Medical Corp. v. JMS Co. Ltd., 471 F.3d
 1293 (Fed. Cir. 2006) .................................................9
Fuji Mach. Mfg. Co., Ltd. v. Hover-Davis, Inc.,
  936 F. Supp. 93 (W.D.N.Y. 1996) ...............................7
Metro-Goldwyn-Mayer Studios, Inc. v. Grokster,
 Ltd., 545 U.S. 913 (2005) ..................................12, 13
Muniauction, Inc. v. Thomson Corp., 532 F.3d
 1318 (Fed. Cir. 2008) ............................................... 11
Oak Indus., Inc. v. Zenith Elecs. Corp., 697
 F. Supp. 988 (N.D. Ill. 1988) ...................................12
One World Techs., Ltd. v. Robert Bosch Tool
 Corp., 2004 WL 1576696 (N.D. Ill. July 21,
 2004) ..........................................................................7
PA Advisors, LLC v. Google, Inc., 2008 WL
  4136426 (E.D. Tex. Aug. 8, 2008) .............................7
                                      iii

          TABLE OF AUTHORITIES – Continued
                                                                         Page
PA Advisors, LLC v. Google, Inc., 2010 WL
  986618 (E.D. Tex. Mar. 11, 2010)............................ 11
SEB S.A. v. Montgomery Ward & Co., Inc., 594
 F.3d 1360 (Fed. Cir. 2010) ............................. 9, 10, 13
Water Techs. Corp. v. Calco, Ltd., 850 F.2d 660
 (Fed. Cir. 1988) ........................................................12
Wine Ry. Appliance Co. v. Enter. Ry. Equip. Co.,
 297 U.S. 387 (1936) ...................................................8

STATUTES
35 U.S.C. § 271(b) .......................................................13

CONSTITUTIONAL PROVISIONS
U.S. Const. Art. I, § 8, cl. 8 .........................................12

COURT RULES
S. Ct. R. 37.3(a) .............................................................1
S. Ct. R. 37.6 .................................................................1

OTHER AUTHORITIES
Bessen, James & Meurer, Michael J., Patent
  Failure (2008) ...................................................... 7, 11
Internet Retailer Top 500 Guide (2010) .......................2
                              1

         INTEREST OF AMICUS CURIAE
     Amicus Curiae Newegg, Inc. is a retailer that
sells goods exclusively on the Internet.* It submits
this brief in support of Petitioners to highlight the
adverse, real world consequences for e-commerce if
this Court affirms the Federal Circuit’s holding that
“deliberate indifference to a known risk” that
infringement may occur is sufficient to prove an
induced patent infringement claim. Newegg has no
direct stake in this particular case’s outcome, but it
does have an interest in patent jurisprudence that
creates certainty, thereby promoting lawful commerce
and efficient resolution of legal disputes, all to the
benefit of consumers, courts, and legitimate compa-
nies.
    Internet retailers face an increasing number of
patent infringement lawsuits asserting patents that
purport to cover some function or feature of their
retail websites. For businesses geared to sell goods,
not write source code, the Federal Circuit’s prior
“actual knowledge” test offered a measure of certainty
– the validity of induced infringement claims could be
directly tested by the retailers’ actual knowledge. The


    * In accordance with S. Ct. R. 37.3(a), all parties have
consented to the filing of this brief. The Petitioners and Re-
spondent have filed consent letters with the Clerk. Pursuant to
S. Ct. R. 37.6, counsel for Amicus state that no counsel for a
party authored this brief in whole or in part, and no person or
entity other than Amicus or its counsel made a monetary
contribution to the preparation or submission of this brief.
                          2

Federal Circuit’s recent substitution of a lesser
standard of negligence based on “deliberate indiffer-
ence” for this bright-line rule of knowledge erodes
that certainty to the detriment of the public interest.
     Founded in 2001, Newegg is one of the world’s
most successful Internet retailers. See Internet Re-
tailer Top 500 Guide 136 (2010) (No. 12, $2.3 billion).
Headquartered in California, Newegg sells elec-
tronics, software, appliances, and electronic games
through its website, www.newegg.com. Although
Newegg is increasingly involved in patent litigation
focused on the mechanics of its website, Newegg
points elsewhere to the source of its meteoric rise, as
attested by the numerous industry awards for cus-
tomer satisfaction and service it has received from
third-party rating and ranking organizations, includ-
ing, for example, the Computer Shoppers’ Choice
Award awarded to Newegg yearly between 2003 and
2009. As Newegg’s business has taken flight, it has
become Velcro for patent litigation from “non-
practicing entities,” claiming a reasonable royalty
measured as a percentage of Newegg’s substantial
online sales, but, in actuality, seeking a settlement
based on a discount of the very high cost of patent
litigation.
     Although Newegg offers over 40,000 products
online, it has been sued only a handful of times for
patent infringement based on the products them-
selves, and, in those cases, it has been indemnified by
its product vendors. Instead, Newegg frequently must
defend itself against non-practicing entities that
                                               3

assert patents allegedly covering systems and meth-
ods which are, at best, miniscule contributors to
Newegg’s business success. Indeed, in a suit brought
against Newegg by Soverain Software LLC, which is
currently on appeal to the Federal Circuit, claiming
that Soverain’s patents covered, among other things,
online “shopping cart” functionality, the jury rejected
claims of direct infringement, but found Newegg
somehow induced its customers to infringe. Suffice it
to say, Newegg has an interest in the proper standard
used to measure induced infringement claims.
                ---------------------------------♦---------------------------------

           SUMMARY OF ARGUMENT
     The Federal Circuit’s apparent relaxation of the
state-of-mind standard to plead and prove induced
infringement – from “actual knowledge” of an asserted
patent to “deliberate indifference” of a known risk
that there might be such a patent – is a distinction
with a real difference to Internet retailers such as
Newegg. Frequently subject to business method and
software patent suits, online retailers face allegations
of indirect infringement pled on information and
belief that generally accuse the retailers of inducing
unspecified and unnamed third parties into infring-
ing patents that plaintiffs claim can be read onto
some aspect of e-commerce.
    Prior to its decision below, the Federal Circuit’s
inducement test, which required actual knowledge of
the allegedly infringed patent, offered a measure of
                           4

certainty. Claims’ validity could be directly tested by
exploring the alleged inducer’s actual knowledge.
Evidence that the accused retailer did or did not have
knowledge of the asserted patent at the time it hired
a website design firm or launched its website could
settle the question.
    For Internet retailers, this certainty was crucial
because it is not feasible for them to research and
analyze all patents potentially reading on their
websites. This is especially true because, until they
are sued, Internet retailers generally are unaware of
the software and business method patents they are
accused of infringing. In many situations, Internet
retailers may lack thorough knowledge of how the
accused systems work because they do not write the
computer code or create the technology that facili-
tates the consumer interactions – they rely on third
parties to provide that functionality. At least until the
decision below, Internet retailers could do business
without fear of somehow inducing customers or
others to infringe unknown patents covering features
the retailers did not even create.
     The Federal Circuit’s decision, however, creates
uncertainty by applying a nebulous standard, namely,
“deliberate indifference to a known risk” that an
infringement may occur. What it takes to avoid
liability under this standard is unknown. What is
known is that it will require a case-by-case analysis
of facts bearing on whether the alleged inducer knew
that a third party might infringe, yet was “indiffer-
ent” to that possibility. This is a daunting prospect for
                                               5

e-commerce companies that are targeted as perceived
deep pockets. Under the hazier “deliberate indiffer-
ence” standard, even meritless claims will be more
likely to survive discovery and summary judgment
given the inherent difficulty in disproving “indiffer-
ence.” It leaves Internet retailers with costly and
unsatisfactory options, such as thoroughly vetting
e-commerce technology so they are not perceived as
“indifferent” to inducement risks, or engaging in
lengthy litigation through trial concerning their state
of mind in order to prove that they were not “indiffer-
ent” to such risks.
     Internet retailers will not bear these costs alone.
They will be passed on to the hundreds of millions of
consumers who shop online. And courts will expend
more time and resources as even meritless claims are
carried to trial on the wings of such a hazy standard.
By eliminating the bright-line rule requiring
knowledge of the patent and substituting a lesser
standard of negligence based on “deliberate indiffer-
ence,” the Federal Circuit has tilted the balance away
from lawful commerce and towards confusion. This
does not serve the patent laws’ goals or the interests
of the public. Instead, it will harm consumers through
higher prices, and through delay of the spread of
technology’s benefits, as Internet retailers scale back
existing offerings or hesitate to deploy e-commerce
innovations for fear of being accused of inducing
infringement of unknown patents by their customers
or others.
                ---------------------------------♦---------------------------------
                          6

                    ARGUMENT
THE COURT SHOULD RESTORE THE BRIGHT-
LINE STANDARD OF “ACTUAL KNOWLEDGE”
FOR INDUCED PATENT INFRINGEMENT TO
PROVIDE NEEDED CERTAINTY TO INTER-
NET RETAILERS AND OTHER BUSINESSES.
     Newegg’s interest in the outcome of a dispute
between competing deep fryer manufacturers is
neither abstract nor indirect. The outcome of this
lawsuit has the potential to add fuel to the firestorm
of non-competitor patent litigation against Internet
retailers. Internet retailers have been the frequent
target of patent lawsuits filed by non-practicing
entities wielding e-commerce patent portfolios, not
only because online retailers have performed relatively
well even in grim economic times, but also because
e-commerce transactions occur in the center of a
complicated web of interactions among a number of
different participants – the retailers themselves,
website developers, retail software providers, web
browser software providers, and consumers.
     One can see how easy it is to allege – and how
hard it is to disprove – that an Internet retailer
induced a website developer, a software vendor, or
even a customer with a home computer and a web
browser to infringe a patent that can arguably be
read onto some aspect of a retail website. A diffuse
standard of proof based on the defendant’s “deliberate
indifference” promotes the assertion of this type of
claim in a legal landscape in which an Internet
retailer now must fear that the launch of its retail
                          7

website may also have represented the launch of an
ill-defined duty to know something about the approx-
imately 200,000 patents that cover software, an
estimated 11,000 of which cover some aspect of the
Internet. See James Bessen & Michael J. Meurer,
Patent Failure 8-9, 22 (2008) (“Bessen & Meurer”). If
a competing deep fryer manufacturer like Pentalpha
with an opinion of counsel in its pocket can be held
liable for induced infringement of a patent that its
counsel was not able to locate, then what chance does
an Internet retailer that is not in the software or web
design business have of finding the poisoned needle
in a haystack of 200,000 stalks?
     Even under an “actual knowledge” state-of-mind
requirement, attenuated claims of “induced infringe-
ment” are frequently pled in business method or
software patent suits, vaguely pointing a finger at
“others” or “end users” as the direct infringers alleg-
edly prompted to infringe by retailers. See, e.g.,
Bender v. Nat’l Semiconductor Corp., 2009 WL
4730896, *3 (N.D. Cal. Dec. 7, 2009) (“customers and
others”); PA Advisors, LLC v. Google, Inc., 2008 WL
4136426, *8 (E.D. Tex. Aug. 8, 2008) (generic group of
end users); One World Techs., Ltd. v. Robert Bosch
Tool Corp., 2004 WL 1576696, *2 (N.D. Ill. July 21,
2004) (“others”); Fuji Mach. Mfg. Co., Ltd. v. Hover-
Davis, Inc., 936 F. Supp. 93, 95 (W.D.N.Y. 1996)
(“others”). Though there has been hope that the twin
lights of Bell Atlantic Corp. v. Twombly, 550 U.S. 544
(2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009),
                           8

might extinguish such ethereal claims, the success
rate is a mixed bag at best.
     Because it takes a village to raise a website –
service providers, software vendors, the retailer, and
its customer base – a non-practicing entity asserting
a patent infringement claim against an online retail-
er often raises indirect infringement allegations
alongside its direct infringement claims, on the
grounds that the retailer induces someone (a software
vendor, web developer, or customer) to infringe the
patent-in-suit. Since a retailer specializes not in web
design but in the sale of goods, it nearly always turns
out that the retailer has not heard of the patent-in-
suit until sued by a non-practicing entity. The prob-
lem is exacerbated if the plaintiff is a non-practicing
entity that produces no products under its patents or
if the claims asserted are method or process claims,
because there is generally no marking requirement in
such instances and there is nothing in the market-
place to which to compare the accused feature. See
Wine Ry. Appliance Co. v. Enter. Ry. Equip. Co., 297
U.S. 387 (1936); Am. Med. Sys., Inc. v. Med. Eng’g
Corp., 6 F.3d 1523, 1528 (Fed. Cir. 1993). Thus,
Internet retailers find themselves at a treble disad-
vantage. They are most likely to be sued in a field
that is not their primary business (software or web
design), by parties least likely to have an obligation to
provide public notice of their patents (non-practicing
entities that do not make products using their
patents), asserting patents for which there is no
                          9

marking requirement (software or business method
or process claims).
     Even so, under the Federal Circuit’s en banc
opinion in DSU Medical Corp. v. JMS Co. Ltd., 471
F.3d 1293 (Fed. Cir. 2006), requiring actual
knowledge to prove intent to induce infringement,
Internet retailers could take some measure of comfort
from the fact that such a claim could be dispatched
once the retailer could show that it lacked awareness
of the patent it was alleged to have somehow con-
vinced others to violate. See id. at 1304 (“The re-
quirement that the alleged infringer knew or should
have known his actions would induce actual in-
fringement necessarily includes the requirement that
he or she knew of the patent.”) (citations omitted).
Alternatively, if an Internet retailer did have
knowledge of the patent, presumably then that would
be grounds for concluding that the underlying claim
had legs. Either way, the dispositive facts could be
developed quickly in discovery.
     The effect of the Federal Circuit’s opinion in SEB
S.A. v. Montgomery Ward & Co., Inc., 594 F.3d 1360
(Fed. Cir. 2010), however, is to substitute for this
clear, bright-line rule a murky standard of “deliberate
indifference.” Id. at 1377 (“The record contains ade-
quate evidence to support a conclusion that [Petition-
ers] deliberately disregarded a known risk that
[Respondent] had a protective patent.”) (brackets
added). Though the Federal Circuit suggested that,
by so doing, it was not changing the legal standard –
and that deliberate indifference “is not different from
                          10

actual knowledge, but is a form of actual knowledge,”
id. – the decision below has for all practical purposes
lowered the bar of necessary proof. Whereas, under
DSU Medical, actual knowledge ineluctably required
knowledge of the patent, under SEB, something less
(though precisely how much less is unclear) is suffi-
cient to pursue induced infringement claims. See
SEB, 594 F.3d at 1376-77.
     The “deliberate indifference” standard has
already muddied the waters of discovery, as plaintiffs
are now able to respond to inquiries about the factual
bases of their induced infringement claims through
references to “information and belief” that defen-
dants have been deliberately indifferent to the exis-
tence of the asserted patents. Plaintiffs are now free
to admit in discovery that they did not provide notice
to the defendants of the pertinent patent until service
of the complaint, so long as they also charge the
defendants with induced infringement based on
allegations of defendants’ deliberate indifference to
the existence of the very same patents of which those
defendants admittedly had no notice before the
lawsuit was filed.
     We do not want to overstate the problem.
Although the new standard necessarily will increase
business costs and legal fees, it does not necessarily
condemn defendants to liability. We note, for example,
that a defense that the retailer cannot possibly direct
or control what its customers do on the Internet may
negate a finding of joint infringement when customers
are a necessary part and parcel of plaintiff ’s patent
                           11

infringement theory, regardless of the state-of-mind
standard on which the courts settle. See Muniauction,
Inc. v. Thomson Corp., 532 F.3d 1318, 1329 (Fed. Cir.
2008); PA Advisors, LLC v. Google, Inc., 2010 WL
986618 (E.D. Tex. Mar. 11, 2010) (Rader, J., sitting by
designation). But, if the claim instead focuses on
anyone, such as software vendors or service providers,
over which a retailer arguably might have “direction
or control,” depending on the facts of their relation-
ship, a standard of deliberate indifference may gen-
erate enough ambiguity to carry such gauzy claims
along.
     For retailers operating an e-commerce business,
it is difficult to manage a risk of “deliberate indiffer-
ence,” the limits of which they may not know until a
jury tells them. The new, lower standard might
require a retailer contracting with a web developer to
spend considerable time and resources, including
legal fees, to educate itself in the field of website
technology, so as to disprove claims that it turned a
blind eye to the possibility of patent infringement.
Given the thousands of patents that may apply to the
Internet, see Bessen & Meurer, supra, at 8-9, 22, an
Internet retailer could easily spend more time and
money educating itself about the intricacies of patent
law than attempting to make its website more inno-
vative and customer-friendly, or attempting to sell its
products and services. “[A]s we have long explained,
patents should not ‘embaras[s] the honest pursuit of
business with fears and apprehensions of concealed
                           12

liens and unknown liabilities to lawsuits and vexa-
tious accountings for profits made in good faith.’ ”
Bilski v. Kappos, 130 S. Ct. 3218, 3256 (2010)
(Stevens, J., concurring in the judgment) (citing
Atlantic Works v. Brady, 107 U.S. 192, 200 (1883)).
Suffice it to say, the patent laws should not be inter-
preted in a manner that will delay Internet innova-
tion and squelch entrepreneurial efforts, i.e., fail “[t]o
promote the Progress of Science and useful Arts[.]”
U.S. Const. Art. I, § 8, cl. 8 (brackets added).
     “In the area of patents, it is especially important
that the law remain stable and clear.” Bilski, 130
S. Ct. at 3232. In Metro-Goldwyn-Mayer Studios, Inc.
v. Grokster, Ltd., 545 U.S. 913 (2005), a copyright
case, this Court cited with approval past precedent
from the Federal Circuit and elsewhere that liability
for inducement must be based on “active steps . . .
taken to encourage direct infringement,” id. at 936
(citing Oak Indus., Inc. v. Zenith Elecs. Corp., 697
F. Supp. 988, 992 (N.D. Ill. 1988)) (ellipses in origi-
nal), or instances where one “actively and knowingly
aid[s] and abet[s] another’s direct infringement,” id.
(citing Water Techs. Corp. v. Calco, Ltd., 850 F.2d 660,
668 (Fed. Cir. 1988)) (brackets in original). Recogniz-
ing the need to “keep from trenching on regular
commerce,” 545 U.S. at 937, the emphasis of the
Grokster Court was barring active inducement, which
went hand-in-hand with knowledge of and intent to
foster infringement. Because the same principles are
at stake, the Court should not endorse a standard for
                                             13

patent cases that undermines the Grokster standard
in copyright cases.
     “Active” inducement is also the hallmark of the
statutory provision at issue here. See 35 U.S.C.
§ 271(b) (“Whoever actively induces infringement of a
patent shall be liable as an infringer.”) (emphasis
added). The SEB standard, however, if affirmed,
would represent an endorsement of a passive induce-
ment theory based on what retailers should have
known about business method and software patents
in fields far beyond the scope of their primary busi-
ness. Consistent with Grokster, the standard that
governs induced infringement of a patent should
penalize those who take affirmative steps to prompt
others to infringe a patent known to exist. The stan-
dard should not, as the SEB standard does, paint a
target on the backs of retailers that contract with
software vendors or web design firms to enter the
burgeoning Internet marketplace. Without a doubt,
such a rule would create unnecessary uncertainty in
the patent laws that would promote and prolong
litigation at the expense of innovation.
                ---------------------------------♦---------------------------------
                       14

                   CONCLUSION
    Based upon the foregoing, the Court should
reverse the judgment of the Federal Circuit.
                      Respectfully submitted,
                      PETER J. BRANN
                      (Counsel of Record)
                      DAVID SWETNAM-BURLAND
                      STACY O. STITHAM
                      BRANN & ISAACSON
                      184 Main St., P.O. Box 3070
                      Lewiston, Maine 04243-3070
                      (207) 786-3566
                      pbrann@brannlaw.com
                      Attorneys for Amicus Curiae
                        Newegg, Inc.
December 2, 2010

								
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